Tuesday, October 3, 2017

Fettering (and flies) of a trustee’s discretion **

Last week, an adviser contacted us in relation to an insurance funded buy-sell arrangement that used options under the contractual arrangement to help facilitate any ultimate buyout.

As many would be aware, this is a widely used, and generally very sensible, approach to take.

The difficulty here was that the parties to the buy-sell agreement included trustees of discretionary trusts.

There are cases (admittedly dating back many years) which provide that unless a trust deed for a discretionary trust specifically allows the granting or an acquiring of an option, then the arrangement will not be enforceable as the trustee has effectively fettered its discretion.

In order for a discretionary trust to remain an ongoing valid structure, it is necessary for the trustee to always retain its discretion and therefore not enter into arrangements which will remove this flexibility in the future.

Traditionally, entering into option arrangements has been seen as clearly limiting future decision making ability and therefore prohibited - unless specifically allowed under the trust instrument.